Pricing in Retail Banking - Scope For Boosting Customer Satisfaction & Profitability

Current Issues
Global financial markets

Pricing is currently more relevant for retail banks than ever before: prices play a
central role for customer satisfaction and profitability. Especially in the current
situation, marked by cost pressure and changing customer expectations, pricing
is thus of particular importance. It presents banks with challenges but at the
same time opportunities.
Trend towards transparency making its mark: technology and regulatory efforts
are key factors. Technology reduces information costs and changes comparison
and buying behaviour of customers while regulation defines the environment for
companies' pricing. Regulation can be a driver of transparency and market
efficiency. At the same time, it needs to take the specifics of financial products
and client preferences sufficiently into account to prevent market distortions and
inefficiencies and to ensure a wide range of financial products.
Customer satisfaction is a complex parameter: customer-bank relationships are
long-term oriented, thus customer satisfaction is very important for banks. Satis-
faction is no mere performance parameter, though, which makes its systematic
consideration in pricing more difficult and requires a particularly intensive
analysis.
The decisive criteria for successful pricing are as follows:
1. Information as a central basis
Price-setting decisions are only as good as the underlying information, for
instance on market developments, competitors and customer preferences.
The capacity to identify the relevant information, assess it and take quick
decisions on this basis will gain even more importance in the future.
2. Consistent integration of price setting strategy into overall strategy
Pricing must fit, both from the customer's point of view and in relation to the
organizational and operating processes within the company.
3. Communication of pricing and related services
Greater transparency in particular requires not only greater efforts by banks
to better communicate their pricing decisions but also the value proposition
of products and services.

Author
Patricia Wruuck
+49 69 910-31832
patricia.wruuck@db.com
Editor
Bernhard Speyer
Deutsche Bank AG
DB Research
Frankfurt am Main
Germany
E-mail: marketing.dbr@db.com
Fax: +49 69 910-31877
www.dbresearch.com
DB Research Management
Ralf Hoffmann | Bernhard Speyer
May 3, 2013
Pricing in retail banking
Scope for boosting customer satisfaction & profitability
2 | May 3, 2013 Current Issues
1. Introduction
Pricing matters to companies for two key reasons: it impacts on customer
satisfaction and profitability.
Banks clients have become more demanding and customers willingness to
switch to other providers has risen. It is against this background they need to set
prices for their products and services at present. Analyses suggest that prices
for bank products play a central role in the consideration to switch banks. In
recent surveys, roughly half of respondents state dissatisfaction with fees and
partly also interest rates as a factor which influences their decision to switch.
1

Furthermore, customers identify pricing as an area where they wish to see
improvements and regard these as a suitable means of increasing satisfaction
with their bank.
2

At the same time, retail banks in Germany are under continuing cost and
earnings pressure. The refocusing of many financial institutions on retail
banking and the emergence of new competitors from other sectors, such as for
mobile payment services, is intensifying competition. Given this situation, pricing
policy may generate short and long-term competitive advantages by boosting
profitability and customer satisfaction.
In addition, pricing for retail financial products matters for the economy as a
whole. Prices serve as signals in markets, provide information and therefore
influence supply and demand of financial products. Prices therefore have an
impact on savings, wealth accumulation and efficient financial market inter-
mediation in an economy and also have distributional effects. Finally, banks
pricing policy for financial products has become increasingly scrutinized by
regulators and subject to public criticism.
How do prices and pricing processes for retail financial products evolve against
this background? The first part of this analysis gives an overview on conceptual
foundations of pricing in retail banking. Subsequently, it examines the role of
customer satisfaction in pricing policy. We conclude this analysis by discussing
the role of regulation and trends that are impacting the pricing of retail financial
products at the moment and in the near future.
2. Pricing of retail financial products the basics
2.1. Prices and pricing policy
Prices typically expressed in monetary units are paid by a buyer to a seller in
exchange for a good or a service. They result from the interplay of supply and
demand this the shortest and at the same time the most comprehensive
explanation of how they are determined.
From the supplier's point of view, prices are key to generate earnings, i.e. they
are decisive for the viability of the company. If, in the long term, it is not possible
to provide a profitable offering that covers costs and enables investors to
receive a decent return, the company will have to exit the market. On the
demand side, customers of course react to prices and at the same time
influence them with their (buying) behaviour.

1
See for example Capgemini (2012) or Ernst & Young (2012). Both surveys were conducted on a
global scale.
2
See Ernst & Young (2012). Respondents most frequently cited changes in fees and charging
structures as the category of measures/activities (out of 15 in total) that they regard as the most
appropriate means of boosting their satisfaction with their bank's product range (potentially).
Prices, utility and willingness to pay 1
Supply and demand determine the price in
a competitive market. By contrast, the
utility a good provides is defined on an
individual basis in the first step. Utilities
determine how much an individual is
willing to pay for a good. They yield the
indifference price, i.e. the price at which an
individual would just be willing to buy the
good. A persons willingness to pay may
be higher or lower than the actual market
price. If it is lower, the individual will not
buy the good. If it is higher, the purchase
yields a personal utility gain, for the
individual would actually be willing to pay
more for the good. The sum of individuals
willingness to pay gives the aggregate
demand in a market. Typically more
people are willing to buy a good at a lower
price.
Preferences, income and demand elasticity of buyers, product characteristics,
production costs and the regulatory framework on the market affect "how much"
a product ultimately costs and which scope an individual company has when it
comes to pricing.
What is more, pricing issues are part of marketing which focuses especially on
the question of how companies adjust their pricing strategy to offer buying
incentives for products. This not only concerns the price level but also decisions
as to how pricing decisions are taken, presented and implemented. Typically,
boosting profits and customer loyalty are key objectives for pricing.
2.2. The market for retail financial products
In theory, three stylised market situations can be distinguished, that is (pure)
competition, oligopoly and monopoly.
3
Market conditions have an influence on
the scope for implementation of companies price policy and their underlying
calculation. In practice, precisely determining the extent of competition in
banking markets presents some conceptual and empirical challenges.
4

Competition between banks already in the market but also potential new entries
matter on the supply side. On the demand side, customer behaviour and
possibilities to switch also affect the intensity of competition. While structural
data, such as the number of competitors or market shares, provide some
information about the market, they typically do not give clear indication of price
levels in a market or the intensity of competition for individual products.
Accordingly, several factors need to be taken into consideration to assess the
degree of competition in a market, including inter alia information on market
structures (e.g. the number of competitors, market shares or concentration
metrics), model-based competition indices and price-based metrics. The basic
idea for the two latter categories is that deviations of actual prices and estimated
values can be used to draw inference on existence and use of market power,
i.e. pricing and (lacking) price adjustments are used for the assessment of
competitive conditions. Essentially, the theoretical approaches reflect the close
link between the competitive situation in a market and the price setting.
In practice, there are numerous reasons for deviations from the stylised model
of perfect competition. For example economies of scale, network effects or
information asymmetries play an important role in retail banking markets.
Furthermore, price setting in the retail banking market is strongly influenced by
the regulatory environment. On the one hand, it has an indirect effect on pricing
via costs and competitive conditions in the market. On the other, regulations can
directly target pricing policy, such as rules with regard to the representation of
price information, for the calculation and adjustment of prices and in some cases
even explicit price caps and price floors. Regulators are confronted with the task
of reconciling consumer protection, efficiency and the stability of the financial
system; companies adjust their pricing policy to the regulation in place.
In Europe, retail banking markets continue to display major differences with
regard to intensity of competition and pricing which reflect the respective
competitive situation as well as local peculiarities. This not only leads to price
differences for certain products, such as for deposits or lending rates, but also to
differences in pricing policy decisions concerning the calculation and present-
ation of prices across Europe. For instance, staggered interest rates for over-
draft facilities are common in the Netherlands; in the UK, pricing models for

3
While monopoly, oligopoly and perfect competition always imply a situation with many customers
but a differing number of suppliers, another variety to be distinguished is the monopsy, a situation
with many suppliers but only one customer. This situation materialises, for example, when
tenders are issued by public authorities, but it is not relevant for the analysis of retail banking
markets in practice.
4
See Northcott (2004) for an overview and ECB (2009) especially for mortgage loans.
Market situation & pricing: competition,
monopolies and oligopolies 2
In a competitive market (large number of
suppliers, high transparency) individual
companies act as price takers, i.e. they
cannot influence a product's price level
and prices equal marginal costs.
In a monopolistic market, prices charged
are typically higher than with perfect
competition. Furthermore, a monopolistic
supplier can practice price discrimination,
i.e. he charges customers different prices
depending on their willingness to pay.
An oligopoly is a situation with several
suppliers who can influence the market.
Prices charged in oligopolistic markets
depend on the strategic interaction
between suppliers, i.e. the decisions of
one supplier influence those of the others
and vice versa. Equilibrium price levels are
not clear ex ante but results may be similar
to a situation with competitive markets if
firms choose to compete on prices.
See Varian (2003) for an introduction.
Different degrees of market concentration
in the European banking market
3
C5 concentration rate in %

2006 2010
Germany 22 33
Spain 40 44
Italy 26 39
UK 36 43
France 52 47
Note: The C5 concentration rate measures the share of the
five largest banks in the sum of assets. It is one possible
indicator to measure market concentration. Higher values
indicate higher concentration.
Source: ECB

accounts without an annual maintenance fee were common for years and
instead higher payments were made for account services via other fee models.
In Spain, the purchase of financial products in some cases brings with it "extras"
such as suitcases and sets of knives, which in Germany are more often
awarded as bonus gifts by retailers in their loyalty programmes.
The retail banking market in Germany seems to be comparatively competitive if
concentration measures are used. Nevertheless, measures of competitive
intensity at the national level only partly reflect local competition conditions.
5

This is an important factor for pricing policy because many banking products
have remained essentially local. Hence, if there are only few offers, this may
lead to local oligopolies or monopolies, so to speak.
Furthermore, the market for retail financial products in Germany can be
characterised as relatively "saturated". In this situation, suppliers compete for
market shares: the more difficult it is to acquire new customers, the stronger the
focus of pricing policy on improving customer loyalty. At the same time, a
greater willingness to switch providers and some survey findings suggest that
it is quite common in Germany by international standards implies a twofold
challenge to banks' pricing policy. On the one hand, they are keen to strengthen
customer relations, on the other, it may be appealing to also use prices to
convince potential "switchers" of the merits of one's own offering.
2.3. Special features of financial products and their importance for
pricing policy
In addition, retail financial products have some special features which have a
strong impact on pricing policies. When making the purchase, it is from a
customer's point of view typically more difficult to assess the actual service
bought than in the case of many other products and services and this applies
irrespective of the price or pricing model. Financial products are bought
relatively seldom, and the dates on which they are paid for and used often
diverge, which typically makes the assessment and ascription of the value more
difficult. Greater uncertainty about evaluating the performance is first of all
typical with services compared to many goods, for instance in the retail sector.
This applies all the more to financial services because the underlying services
are quite abstract. Furthermore, quality and the benefit from a customer's point
of view, for instance the functionality of payment services or the performance
and returns of investment products in many cases become apparent only over
time which distinguishes them from other services, such as manual repairs,
cultural events or holiday trips which are linked with more immediate and
obvious utility gains for customers.
Furthermore, retail financial products tend to be low involvement goods, i.e.
there is not much excitement about and interest in the product itself in many
cases. Account and payment services are perceived similar to infrastructure
services, which hardly get noticed (unless they fail to function). As for invest-
ment and lending products, in turn, interest and appreciation are focused on the
target, i.e. wealth accumulation, the purchase of a car or a house, while the
investment itself is rather associated with a certain amount of effort and some
uncertainty, and the loan mainly with obligations (and potentially also
uncertainty as to the ability to pay it back).
What does this mean for pricing policy? On the one hand, a low level of
perceived benefit or utility reduces the willingness to pay. On the other, this
notion is counteracted by the fact that the purchase of many financial products
is essentially purpose-driven (wealth accumulation, hedging or financing
purchases) and/or there is a substantial need to be addressed (financing a

5
See Fischer/Hempell (2006) and (2007) for example.

Services associated with financial
products 5
Service performed Example
Risk-taking Lending
Transaction Transfers
Management & custody Account, deposit
Intermediation
Foreign-exchange
transactions
Provision of means of
payment
Loans, credit cards
Sources: Bschgen/Brner, 2003, DB Research
0
1,000
2,000
3,000
2000 2005 2010 2011
Fewer banks in Germany 4
Total number of credit institutions
Including legally non-independent building and loan
associations
Source: Bundesbank annual statistics
purchase, payment services). Their urgency in turn affects willingness to pay
and price elasticities, i.e. to what extent price changes lead to changes in
demand.
Customers typically know less about prices when they buy a product less
frequently. This can make it more difficult to assess precisely whether an offer is
particularly good value or too expensive because they do not (or not precisely)
know the market price and do not remember the price of former transactions.
While this can mean greater scope for pricing, possibilities for information
gathering and competition between suppliers set limits in practice, though. In
addition to buying frequency which affects (implicit) knowledge of prices and
products, spread of products also plays a role. For example, spread leads to a
decline in information costs because asking for information is straightforward
and makes it easier to get information about bread and butter financial
products. At the same time, especially in the case of major financial decisions,
e.g. when taking out a real estate loan, there is a stronger basic incentive to
extensively gather information before purchase because the decision implies
considerable financial commitment and is also important for one's own life and
asset planning.
Furthermore, the information customers gather influences their expectations and
judgement of prices. To that effect, firms pricing needs to take into account
customers information behaviour, what price and product components they
focus on and on what basis they compare offers. One example of this is that
customers increasingly use price comparison sites before making a purchase.
However, this also means that their focus somewhat shifts towards those
features that they can easily research and compare online or that get flagged on
comparison sites. If pricing does not take this into account accordingly, offers
perform poorly in comparisons or do not even show up at all. The example
shows that information behaviour has repercussions on pricing and also product
design. It also emphasises that pricing has to consider the interplay between
customers information behaviour, distribution channels and buying decisions.
Finally, that customers are often somewhat uncertain when it comes to
evaluating financial products presents a particular challenge for designing
pricing strategies. A competitive price is part of the "package" that convinces a
customer to buy a product. The price however is evaluated in relation to
expected performance and value associated with what is purchased. If
customers are uncertain about what they will get, it is less clear which price can
actually be convincing or corresponds with a certain satisfaction level from the
customer's point of view. At the same time, prices are important beyond a single
transaction as they feed into longer-term buyer-seller relationships. When it
comes to the assessment of performance and evaluation of products, pricing
policy can mitigate this only to a limited extent. Nonetheless, it remains a
decisive factor as to whether price level and price models have a negative effect
on customer satisfaction and profitability. Here, it must be taken into account
that due to uncertainty when it comes to the assessment of performance
factors such as perceived fairness of prices from the point of view of the
customer play a larger role for customers satisfaction with prices.
2.4. Only a question of price?
Of course it is also relevant for the execution of pricing policy to what extent
prices actually play a role in the purchasing decision. A low level of interest in
the product itself does not necessarily mean that the price is not considered
important when buying. Here, the price level is usually only one factor. For many
consumer goods factors such as innovation, design or prestige often have an
influence on the purchasing decision and can help to differentiate the products
and increase the willingness to pay think of consumer electronics or cars. With

Invest.
fund
Shares/
bonds
Personal
loan
Credit
Card
Bank
account
0
10
20
30
40
Information via newspapers, websites and other
publications
Information via friends and family
Recommendations come via different
channels 6
Share of respondents who bought the product and
received recommondations from respective
channels before purchase
Values are averages for the EU.
Source: European Commission (Eurobarometer 373), 2012
Mortgage
loan
5
38
56
Yes, frequently Occasionally No
Consumers keep an eye on home loans 7
"Do you follow developments in mortgage rates?"
n=1000, sample of German population, %.
Source: TNS/ING-Diba 2012
financial products other moderating aspects come into play. Convenience
factors such as proximity and accessibility of the offer, i.e. whether there is a
local bank and which services it provides via different channels are considered
in the purchasing decision. These aspects may contribute to the formation of
various sub-markets, i.e. depending on how much customers take other factors
into account besides the price, the offering becomes differentiated, such as
between branch-based banks and direct banks. On top of this, one precondition
for the purchase of financial products is a certain degree of trust precisely
because it is often difficult for the customer to make a performance assessment
for products. Correspondingly, reputation, (perceived) competence and security
also play an important role. Factors other than price levels that play a part in the
purchasing decision may reduce price elasticity and are a reason why price
differences among suppliers in a market may exist over a longer period of time.
2.5. Pricing policy for financial products requires differentiation at the product
level
Besides taking these general characteristics into account, pricing strategies
require assessment at the product level because ultimately this is where many
parameters differ. Products have specific features and influences of competition
and environmental factors may also vary. Product characteristics that affect the
execution of pricing policy include:
1. The level of standardisation: The more homogeneous the product, the more
intense the price competition usually. So for current accounts this should
tend to be more pronounced than for individual asset management.
2. Innovation: With new products there is often greater scope for structuring
prices, since the benchmark is less clear and the focus is on the innovative
aspect of the product. Accordingly, stiffer price competition is the outcome in
areas where there is little (scope for) innovation and generally also for the
"classics" such as current accounts or simple instalment credit.
3. Seasonality and trend dependency: Trend products can typically be sold at
higher prices than standard items, since buyers are prepared to pay a
corresponding premium. Although financial products are less seasonal than
consumer products such as clothing, skis or ice cream, investment products
in particular are nevertheless subject to trends, e.g. investments in certain
sectors or regions that impact on demand.
4. Urgency and substitution options: While urgency usually raises the willing-
ness to pay and reduces price elasticity, the range of options for substituting
providers and products is an important factor in the pricing of individual
products. The more obvious alternatives there are, the less scope there is to
enforce premia on individual products. Here, too, substitutes are frequently
used to circumvent price restrictions in sub-markets.
This shows clearly that pricing policy for operating decisions has to factor in
very specific product characteristics and the purchasing situation, but that at the
same time a product cannot be examined in isolation, because substitution
options influence demand. At the same time, exogenous influences have a
differing impact on supply and demand for individual retail finance products.
For example, macroeconomic conditions have a bigger impact on loan and
investment products, whereas the demand for "bread-and-butter financial
products", such as bank accounts, is relatively stable. For the latter, by contrast,
the trend towards online banking, the competition between traditional banks and
direct banks as well as the increased use of comparison tools to assist in
purchase decisions is a key issue for pricing.

Money market funds in the US and
substitution effects 9
In the US since the start of 1930s interest
rate ceilings had applied to deposits at
commercial banks, while the paying of
interest on demand deposits had been
prohibited. Partly this was also meant to
prevent excessive competition for
deposits that could have a negative
impact on financial stability. One effect of
the regulation was that savers went
looking for alternative investment
opportunities. Money market funds thus
increasingly emerged as alternatives in
the 1970s when the yields on US
Treasuries were much higher than the
interest rate ceiling on savings deposits.
See also Gilbert (1986).
BY
BW
SN
NW
HH
NI
RP
TH
BE
MV
HB
SL
SH
ST
HE
BB
R = 0.2
1000
1500
2000
2500
3000
65 75 85 95
Richer parts of Germany search investing
options more actively 8
X-axis: Search for term deposits,
Y-axis: Per-capita saving
Index search frequency (2004-2012), saving (2009).
Data for German Lnder.
Sources: Google Trends, DSGV/Federal statistical offices
of the Lnder
0 20 40 60 80 100
ES
UK
NL
DE
PL
Credit transfer Direct debit Cards Cheques
... and different payment habits 12
Share of cashless transactions (2011)
Excluding e-money transactions and other forms of payment;
therefore less than 100% in some cases.
Source: ECB, 2012
The job of pricing policy is to know the relevant market and product character-
istics, to correctly assess their relative importance and their combined effect
and to use these as the basis for decisions about the price level and models.
How is payment made for which products?
The prices of banking products are paid in the form of fees, interest or
commissions. In general a distinction can be made between unit-based and
value-based prices. This applies both from the standpoint of the customer, who
pays a unit price for an additional account statement sent by post and pays
value-based interest rates on loans, and from the standpoint of a bank that can
choose unit and value-based variables for calculating and setting prices, such
as the number of portfolios or the value of portfolio transactions executed.
6
The
question that also arises is whether a fixed amount is paid or a variable fee
dependent on the individual services used.
7
This is often linked with the pricing
policy consideration whether a price is being set for individual services or a
package of services. Both bundling and splitting up into individual services or
prices can make sense in terms of pricing policy, as they can influence the
perception of prices and thus willingness to pay.
A distinction can be made between three areas:
1. Pricing of accounts and payment services
Typically a price is set for a package, i.e. the use of an account and the
associated payment facilities and services; hence decisions about the price
level and scope of services provided are closely linked. Pricing solely on the
basis of use of individual service components, would be onerous think for
instance of separate charges for every standard payment transaction or the use
of telephone and web-based banking services and imply some uncertainty for
the customer and the provider. Each customer would be faced with a different
price that would be unclear ex ante. In fact customers often show a preference
for straightforward models, for example where they make regular payments of
basic fees that are convenient, easy to monitor and do not require repeated
purchasing decisions that are frequently regarded as unpleasant. The degree to
which a basic price reflects the actually paid end price depends on the breadth
of services contained in the package and the availment of (additional) services,
such as the use of payment services in different forms, overdrafts, the number
and type of debit and credit cards held etc. As a result, some users who stay
within the scope of the pre-defined package of services only pay the flat fee,
while others end up with a fixed fee and a variable top-up. Price calculation thus
requires information about costs and usage of the individual components as well
as about the demand for certain service packages at a particular price and
information about how the individual price components and payment models (for
instance annual or monthly fees) are perceived by the customer.
2. Pricing of credit products
The prices of credit products usually comprise fees and interest. The rate of
interest is basically the price paid for using another partys money. Savers who
provide capital receive compensation for deferring consumption. Borrowers in
turn obtain the opportunity to satisfy immediate consumption desires or invest
money in projects. Differences in interest rates reflect the underlying terms of
the loan as well as credit risks.
Banks serve as intermediaries between the providers of capital and borrowers in
an economy. From the bank's point of view the interest payments must cover

6
Bschgen/Brner (2003).
7
It is also possible to combine both models, such as a basic fee, which covers certain services,
and other fees incurred when additional services are used.
Different infrastructure 11

ATM per million
inhabitants
POS terminals per
million inhabitants
Population / branch,
000
DE 1.030 8.693 2,2
FR 893 22.152 2,3
IT 859 20.795 1,8
UK* 1.006 19.083 5,3
*2011 data, UK 2009.

Sources: DB GM Research, BIZ, 2012

Pricing models for bank accounts in
the EU 10
In Germany key cost components for
accounts are annual or monthly charges
for basic account maintenance as well as
fees for debit and credit cards. In this
regard, however, there are differences
between the EU member states. In the
UK for instance the dominant models
used to be fee based, which meant that
often the account was maintained free of
charge as long as it was in credit. Costs
from the customer's point of view were
primarily incurred via fees for opening
and closing accounts, as well as for
overdrafts or withdrawals. This model,
though popular when launched, has
increasingly been called into question.
Generally, differences between pricing
models for accounts reflect both
differences in competition as well as in
the use of account and payment services.
the costs of lending. At the same time, the expected yield on the loan should at
least match that of an alternative investment in the capital market, otherwise the
opportunity cost principle would render it more appealing to invest capital there
than to lend it. Key cost components that influence the calculation of loan
interest are:
Refinancing costs are the costs incurred by the bank on the financial markets
in raising capital for lending. Banks raise funds via the capital market or via
deposits. If their funding costs rise for example due to a hike in central
bank rates, regulatory changes or due to stiffer competition for deposits
this is usually reflected in higher lending rates, too.
8

Risk costs accrue because lenders can default. The bank tries to assess this
before lending and to do so relies for example on information from existing
customer relationships, information supplied by the customer, public sources
or information from SCHUFA, the credit rating agency in Germany. With the
aid of among other things scoring models that collate information from these
different data sources, the expected probability of repayment can be
calculated and factored into the lending rate. Models for pricing risk can differ
among providers and may translate into differences in prices. If a loan is
backed by the commensurate collateral this reduces the risk costs.
Costs of capital are incurred by banks because they have to hold capital
reserves in case of unexpected losses and the providers of capital expect an
appropriate yield on their invested capital.
Operating costs are the costs associated with lending for the application,
examination and decision on lending from the bank's point of view. These
include for instance working hours spent on consultations but also the cost of
internal coordination and decision-making processes for lending or the IT
costs for programming and maintaining models that are used during this
process. Operational efficiency is therefore also a factor influencing lending
conditions formulated by banks. For the German market, analyses suggest a
positive correlation between costs and lending rates, i.e. low costs translate
into lower rates as pricing policy is geared towards winning market shares.
9

The payment the bank receives for providing a loan ultimately adds to revenues,
profits and other relevant metrics.
Loans to households are usually used for financing consumption or property.
They differ according to their availability, typical duration, repayment conditions,
their collateral and thus the associated risks and expenditure (see also Box 13).
These differences are also reflected accordingly in their pricing.
Loans with a higher default risk and without collateral thus tend to cost more.
With longer-term loans the expected longer-term refinancing costs are thus a
more important factor.
3. Pricing of investment products
When purchasing investment products a basic distinction can be drawn between
the prices of securities and the advisory service associated with their purchase.
a. Again different types of investment products feature different price
components. These include one-off fees, such as commissions for buying
and selling shares or initial sales charges for investment funds, as well as
regular components, e.g. management fees for funds.
b. Advisory services range from advice when purchasing an individual
security and the devising of personal investment strategies through to

8
See Ahlswede/Schildbach (2012), Zhres (2012).
9
See Schlter et. al., (2012).
Standard forms of credit for retail
customers 13
Overdrafts are used for bridging
short-term financing bottlenecks.
Their use typically does not involve a
separate loan application by the
customer or a loan approval by the
bank. A possible overdraft limit is
typically agreed in advance for a
current account receiving regular
deposits and is set according to
creditworthiness, how the account
has hitherto been maintained and the
client relationship. Moreover, no
explicit repayment terms are set.
Consumer credits are used to finance
purchases and are granted by the
bank according to predefined repay-
ment terms (maturity and principal
repayment) following an approval
process. The main form of collateral
for consumer credits is claims on
earnings.
Medium-term loans for purchasing
higher-value consumer goods are
also granted after dedicated checking
of personal creditworthiness on fixed
repayment terms, mostly in monthly
instalments. Lenders may accept as
collateral the transfer of title on the
acquired objects themselves,
attachable claims on earnings or also
mortgages on real estate.
Mortgages and land charge loans are
long-term loans secured on real
estate. They are typically used to
finance the acquisition of property
and/or the construction of buildings.
Mortgage loans can be granted on
fixed or variable interest rate terms.
In Germany the majority of
mortgages are fixed-rate loans with
maturities of several years. As a rule
phased financing is agreed, i.e. the
interest rate and principal repay-
ments are fixed for a specific period
and subsequently the terms for
follow-up financing are negotiated
based on the residual debt.
See Bschgen/Brner (2003) for example.
portfolio management. Charges for advisory services can be paid in the
form of fees or commissions.
10

In addition, there are custody charges for the securities held in the portfolio and
the associated information services, e.g. the production of earnings statements
or tax certificates as well as the processing of transactions, such as stock
market placements. Retail banks offer securities services that differ in scope
and act as both intermediaries and providers of products.
2.6. How are prices computed?
Computing prices requires information about which amounts of a product can be
sold at which price and how much of the sales revenue ultimately remains after
the costs are deducted.
Against this background the prices of retail financial products are mainly
determined using a market-based approach. The criteria on which this is based
are internal cost data, analyses regarding willingness to pay, price sensitivity
and the behaviour of competitors. Costs define the lower bound while analyses
of willingness to pay help to identify the upper bound for prices. Profit margins
provide information on a products contribution to overall company profits at
given prices. In addition, potential reactions of competitors to pricing decisions
are taken into account. All this information is combined for operational pricing
decisions. Price elasticities, i.e. how much changes in price influence the sales
of a product, as well as cross-price elasticities i.e. to what extent price
changes for one product affect demand for other products are key when
deciding about price adjustments. Hence, calculations guided by a market-
based approach are always a bit iterative but also strategic as suppliers
consider other players actions. As a result, the price that is charged reflects
what can be "achieved in the market". The logic of the market-based approach
applies to both adjustment in the price level and to changes in entire price
models, for instance switching from single payments to a flatrate.
In retail banking markets, the behaviour of competitors plays a particularly
important part in banks pricing considerations. A survey about the pricing
strategies and tools of European retail banks suggest that almost half of
respondents rely on benchmarks as key decision-making tool, and for more than
90% comparing their own offers with competitors is at least one of the pricing
techniques they use.
11

Keeping a close eye on other firms when setting prices can be an indication of
stiff competition in a market. At the same time it reflects a certain amount of
leeway in cost calculations. Production of retail banking services involves a lot of
intangibles and fixed costs. These overheads need to be apportioned to
different products and/or activities which sometimes can be a challenging task.
In addition, there can be reciprocal effects between products. The earnings from
the sale of a single product can thus be small or even negative but a low price
can still make sense if it helps to boost overall sales or strengthen customer ties
in the longer term. One example is favourable conditions for student accounts,
which can be regarded as a type of "upfront investment" in a longer-term client
relationship and also reflect the usually low willingness of this group of
customers to pay for services.
12
Economically speaking, this involves cross-
subsidies, either over time or across customer groups.

10
See Ahlswede (2012).
11
See Oliver Wyman (2012). Survey of 107 European retail banks.
12
Examples of this can also be found in the pricing models used in other sectors, such as
differential ticket prices for certain groups of customer attending cultural events.
Main types of fees for investment
funds 14
Initial sales charge: one-off fee paid when
the purchase is made, with the amount
also dependent on the type of fund.
Total expense ratio: annual fees that
include the costs of operating and
managing the fund as well as
administrative expenditures and
custodian bank fees.
Transaction costs: Costs incurred when
portfolio switching takes place.
Performance-related fee: for example, fee
paid to the fund manager of an actively
managed fund whose performance
exceeds a pre-determined benchmark.

0
20
40
60
Simple structure No major
change(s)
Complex
structure
What will be the structure of most investment
products in the certificates market in the future?
Trends towards simpler products in
the certificates market 15
Survey of 21 securities issuers, %
Source: Derivateverband, 2012
42.9
33.3
23.8
Service offerings (e.g. wider range of
information)
Price
Product quality at the same price
Competition expected on price and
service 16
Survey of 21 securities issuers, assessment of
the certificates market, %
Where will the competition be focused in future?
Source: Derivateverband, 2012
3. Customer satisfaction: A pricing policy objective
Managers seek customer satisfaction as a pricing policy objective as they
assume a positive link between customer satisfaction and profitability. Satisfied
customers return for purchases, buy more and help to attract new customers via
recommendations, while dissatisfaction leads to complaints, lost customers and
reputational damage. But what actually drives customer satisfaction, its impact
on business and what can firms do to boost it and/or prevent dissatisfaction? As
it turns out, answers to this are somewhat complex.
Strategies that focus on customer satisfaction as a key objective have a
relationship-based approach and typically take a longer-term view. While short-
term frictions between profitability and customer satisfaction cannot be ruled out,
e.g. when considering price increases, customer satisfaction remains indispens-
able for long-term commercial success in a competitive market. Since financial
services in particular are geared towards longer-term client relationships and
banks need to actively compete for customers, this indicates the major
importance of satisfaction for pricing policy in retail banking.
Satisfaction materialises when expectations are fulfilled or exceeded. It is thus
based heavily on comparison and assessment that are impacted not only by
objective/objectifiable factors but also by subjective perception. Customer
satisfaction is a concept that is difficult to grasp in the framework of traditional
pricing research and in microeconomic models that assume rational behaviour
and full information about prices, products and preferences. For instance it
would not matter to a perfectly informed buyer whether he pays a flat fee or a
usage-based charge; as long as the overall price (incl. transaction costs)
remains the same, this would have no influence on demand. In reality what can
however often be observed is that different price models or the visual present-
ation of prices influence purchasing decisions this explains for instance the
popularity of prices that end with the figure "9" or the trend towards underestim-
ating charges levied subsequently. Prices also often trigger (emotional) react-
ions such as doubt, annoyance or regret not only at the moment the purchase
itself is made, but also beforehand and/or afterwards.
Behavioural pricing analyses also examine how buyers react to different offers
and how they handle (price) information for decision-making.
13
As a complement
to traditional pricing research they can thus help in understanding buyers'
behavioural patterns and also the potential drivers of satisfaction or dissatis-
faction.
3.1. Determinants of price (dis)satisfaction and the impact on general
satisfaction
Price satisfaction is not identical to overall customer satisfaction, but it can be a
major driver of this. For instance, several analyses have identified problems with
prices as a key cause of dissatisfaction of customers and as one factor in their
decision to change banks.
14
Note, however, that price satisfaction and dissatis-
faction with prices are not symmetrical concepts, i.e. if bank customers are not
explicitly dissatisfied with the pricing this does not automatically imply a positive
rating, also price satisfaction and dissatisfaction with prices are not necessarily
influenced by the same factors (to the same extent).
15

Dissatisfaction with prices is often triggered by perceived unfairness.
16
In this
case outcome and process are rated, i.e. the price level and how it came about
from the customer's point of view. Fairness judgements imply comparisons,

13
See Homburg/Koschate (2005) for an overview.
14
See Colgate/Hedge (2001).
15
See also section 3.2.
16
See Xia/Monroe/Cox (2004).
Alternative pricing procedures
17
Cost-oriented methods are an alternative
means of establishing prices. The method
corresponds to a "cost+x" rule, i.e. inter-
nal cost calculation is used to determine
costs per unit and a margin is added.
What appears straightforward at first
glance is not as straightforward after all,
especially for companies with a high
proportion of intangible inputs and over-
head costs, since it is frequently not
possible to log precisely how long
particular work processes require and the
allocation of overhead costs always
provides some leeway. One basic
problem of cost-oriented processes is that
the willingness to pay and the link bet-
ween price and sales are ignored; to a
certain degree pricing occurs "outside the
market". This means not only possibly
"wasted" earnings potential from a
company point of view, but under certain
circumstances also disadvantages for
customers, as there is little incentive for
demand-oriented price and product
innovations. This is a serious handicap
particularly in mature markets with stiff
competition, where active pricing policy
could be used to gain market share.
either on the basis of personal experience (previously paid prices) or inter-
personally, i.e. whether others possibly pay a lower price. On this basis buyers
rate prices as either appropriate, advantageous or unfair, with the latter evoking
negative and usually the strongest reactions. Research findings suggest that:
17

1. The reasoning for pricing plays a part in its rating.
18

Cost-based pricing and price rises are more likely to be accepted, especially
if these are caused by factors that the supplier himself cannot influence and
the company's profits do not rise due to the increase. Demand-based price
increases, e.g. when customers urgently require a service or have few
alternatives available, and the company thereby boosts its profits, are often
perceived as unfair.
2. Customers look beyond prices for a particular transaction.
Buyers assess prices for individual services or price changes in the context
of their overall experience with the supplier, i.e. if they have had positive
experiences in the past and are satisfied this can help to mitigate negative
reactions to price increases.
3. The general perception of the company and/or the sector also influences
how prices are judged.
Image effects of individual companies play a part here, i.e. if a company is
generally regarded as a keenly priced supplier this is often assumed to be
the case for individual transactions as well whether this is actually the
case or not. That also overarching factors, such as the perception of a
sector overall or macroeconomic conditions, are also incorporated in
assessments means that pricing policy must be conducted in a
correspondingly context-sensitive manner.
Ultimately the comparability of transactions and the choice of reference points,
i.e. what serves as measure for comparisons is a major factor. Different prices
for the same service are hard to justify even though a price differentiation can
be based on economic reasoning reflecting differences in clients willingness
and ability to pay. The interaction of pricing policy and product design are
important in this respect. Products that are (perceived as) different can be
offered at different prices without this having a negative impact on customer
perceptions.
Prices regarded as unfair typically reduce the esteem for the product purchased
and often trigger further-reaching reactions. Studies suggest that prices of retail
financial products deemed to be unfair are an important reason for switching
providers. However, they seldom result in complaints being made directly to the
provider.
19
This pattern can be a problem for banks pricing policy because it
means that the impact of price dissatisfaction only becomes visible with a time-
lag essentially when it is too late for suppliers and that aggrieved customers
seek other ways to express displeasure.
20
Complaints via social networks or
political pressure for stricter regulation of pricing can be examples of this.
As with overall satisfaction, price satisfaction is generated when the actual price
matches with a customers expectations.
21
Note that price satisfaction does not
require necessarily the lowest price. Equally, price satisfaction does not decline
automatically when the price rises. Here, too, comparisons, context and the
intermediation process influence the outcome.

17
Ibid.
18
See Homburg/Koschate(2005) and Kahnemann/Knetsch/Thaler (1986 a,b).
19
See Colgate/Hedge (2001).
20
Studies also suggest that complaints behaviour differs from country to country.
21
See Diller (2007).

0
10
20
30
18-24 25-34 35-54 55+
Source: Ernst & Young, 2012
Global pool of respondents (n=28,560).
Share of respondents whose top priority is for
their bank to change its pricing structures and
interest rates. By age group
Price more important for older
customers? 18
Price satisfaction is a product of several elements, for retail finance products in
particular a distinction can be made between the following factors:
22

1. Price-quality ratio, i.e. whether the costs are perceived as commensurate for
the quality of the service offered.
2. Relative price, i.e. how the price measures up to competitors offers.
3. Price reliability, i.e. whether the price is currently good value and whether
the presumed price corresponds with the actual price or contains "hidden
elements" that are not visible at first glance.
4. Price fairness, i.e. whether the price is judged to be fair and just(ified) by the
customer.
5. Price transparency, i.e. whether the price is clear and easily understand-
able.
The relative importance of these components can be established using survey
data and quantitative market research. For instance, the findings of an analysis
of Austrian bank customers suggest that all of the above-mentioned factors
have a significant influence on price satisfaction, but influence it in different
ways:
23
Several components, such as the price/quality ratio, the relative price
and price fairness, strongly reduce price satisfaction if the satisfaction in those
sub-areas is low; high readings among the satisfaction components boost price
satisfaction overall to a much lesser extent. Other factors such as price
reliability, by contrast, have a greater impact if satisfaction is high here. A third
group has a relatively symmetrical impact, with price transparency being one
example. Thus, when considering measures to increase (price) satisfaction,
strategies require careful planning: Some components are more effective to
boost satisfaction. Others may generate little positive impact but can still be
highly disadvantageous if suppliers neglect them.
The basic conceptual logic on price satisfaction components is the key take-
away, i.e. dividing satisfaction up into different parts and realising that these can
act asymmetrically. The specific empirical results on which components matter
and to what extent are informative, but their general applicability to the
execution of pricing policy in retail banking may be limited. While working with
survey data always involves some caveats
24
, there are two additional issues in
this case: 1. Older analyses cannot reflect the change in the situation following
the financial crisis and also increased competition from direct banks, and 2.
results from different countries are only applicable to a certain degree, because
expectations regarding price level, services, cost consciousness and also
switching options are heavily influenced by the national context. This is not only
a challenge for research aimed at making cross-border comparisons. Often
cross-country comparisons form the basis for defining the regulatory provisions
for pricing policy, particularly at the European level. However informative these
assessments may be, it is important to select indicators carefully and to take the
market-specific context properly into account in order to avoid drawing the
wrong conclusions.
For managers, however, existing analyses leave a different gap: It is difficult to
derive operational strategies for their companies own pricing policy or even
individual products on this basis. Companies want information about the expect-
ations and experiences of their customers and how these may differ from their
competitors. Scholarly research and aggregate analyses can be a first step in
this respect, establish conceptual principles and point to dissatisfaction

22
See Matzler et al. (2007).
23
Ibid.
24
Attention should be paid here for example to the scope and composition of the group of
respondents as well as the survey context and precise wording of the questions.
Who decides about prices and why
does it matter? 19
Pricing policy also includes the organ-
isation of pricing decisions and their
implementation in the company, e.g.
who decides about prices and whether
decisions are taken in a (de)centralized
manner. Increasing the price-setting
scope for local decisionmakers allows
for more consideration of specifics and
individual client relationships, which can
boost profitability and customer satis-
faction. One disadvantage of decentral-
ized pricing decisions is a potential lack of
consistency internally and externally ,
efficiency losses and increased uncertain-
ty for the organisations overall calcul-
ations. There are also some regulatory
requirements that require common pro-
cesses throughout the company.
Which solution makes practical sense is
decided among other things by company
size, geographical presence and pro-
ducts. For the latter there tends to be a
positive correlation between more stand-
ardised products and centralised pricing.
What is also important from an organ-
isational point of view is that decentral-
ised decision-making scope in price-
setting is combined with smart incentives
and that these are also regularly eval-
uated.
(potential) but at the same time prompt providers to conduct more detailed
analyses to learn about their own clientele.
3.2. Satisfaction: Important but a difficult concept to manage
Customer satisfaction is harder to manage than other business metrics (e.g.
earnings). This is because the drivers of satisfaction/ dissatisfaction are more
complex. It is often the case that the relationships are not linear ("the more X,
the greater the satisfaction"), factors interact or effects only occur in certain
customer groups. A better understanding of these relationships is ultimately in
the interest of all market participants. In order to make satisfaction a usable
variable for pricing policy, good and timely data is a sine qua non.
25
Secondly,
the findings of behavioural economics and pricing research underline that
pricing policy is not an isolated issue. Ultimately pricing policy and the overall
value-proposition have to tally from the customer's point of view. Companies
need to embed pricing as part of their overall strategy and communicate offers
accordingly in order to achieve this.
3.3. Current pricing trends opportunities for increasing satisfaction?
Data analysis is the prerequisite for better handling of customer satisfaction as a
target of pricing policy. At the same time data analysis is key to current pricing
trends inside and outside the retail banking sector. A number of these trends will
be addressed below.
1. Dynamic pricing is the rapid adjustment of prices to demand conditions
based on real-time data. Examples of this include airlines which price their
tickets according to the remaining seat availability. Increasingly, dynamic
pricing is also being deployed in the retail sector to improve inventory and
supply-chain management. For consumers this means more frequent
adjustment of prices. However, due to experience with online purchasing,
this may become more and more acceptable offline as well. Also, price
adjustments are increasingly being linked with targeted marketing
campaigns for specific customer groups, for instance via email or social
networks. One potential disadvantage of this approach is a lack of con-
sistency and thus reliability in the customer's perception and the fact that
aggressive promotional offers can often be regarded as a nuisance.
2. Behavioural pricing is a form of price discrimination in which different prices
are charged based on the usage and/or buying history. The area where it
has the most potential is for online purchases, as collecting and evaluating
large volumes of data are easier via this channel. In this case, too, price
offers are often combined with targeted promotional campaigns. Similarly,
the downside in such cases is that promotional campaigns are perceived
negatively, that concerns persist about the protection of personal data and
privacy and also that price differences, even if they are the result of one's
own behaviour, can be considered unfair.
3. Loyalty pricing can be considered a special type of price differentiation
based on behaviour, since the idea is that loyal customers are rewarded
with better conditions. This is widespread in retailing, for example, where
typically the repeated purchasing of certain products from the same provider
or a purchase above a certain value is rewarded with more favourable terms
or bonuses.

25
To do this a detailed analysis could be carried out for example on the significance of prices and
individual components for price satisfaction in different phases of the purchasing decision and the
impact on different customer groups. Also, the influence of context factors and the conveyance of
price presentation, price changes etc. requires more analysis.

0%
25%
50%
75%
100%
Use of loyalty pricing as pricing
policy tactic
Never Sometimes Often Always used
Survey of 107 European retail banks
Source:: Oliver Wyman 2012
Loyality pricing: used rarely 20
To a certain degree one variant of loyalty pricing is relationship pricing,
which factors the client relationship overall into the price-setting procedure.
For instance, customers in network industries often obtain a more favour-
able price if they purchase a bundled offering of several services such as
internet, telephone and TV.
What do these trends mean for pricing in the retail banking segment? First of all,
some elements of them are not entirely novel: credit products reflect changing
refinancing costs and thus contain at least a certain dynamic component. The
incorporation of personal risk factors into the interest rate includes to a certain
degree behaviourally based price differences. And price reductions for good
customers are not very different from loyalty programmes in terms of the basic
idea.
26

At the same time, the approaches described above offer opportunities for
instance for faster adjustment to competitors via dynamic pricing, better price
and service differentiation according to differing customer requirements and
local market conditions, and thus the potential boosting of profitability and
customer satisfaction. Adoption and success of these pricing strategies in retail
banking will also depend on changing customer habits, for instance with regard
to technology usage, information behaviour or purchasing experience in other
sectors. Rather than a fundamental revolution to banks pricing, these
approaches are likely to lead to a gradual optimisation of calculations and
models. This is also suggested by a relatively stable product range in the core
business of retail banking. Fundamental challenges to price models can, how-
ever, arise in several sectors due to new competitors (also outside the banking
sector) and regulatory provisions that explicitly require changes in pricing
models or implicitly influence the pricing calculation.
4. Pricing policy and regulatory conditions
Regulation means new demands being placed on pricing policy at different
levels; it can include, for example, rules concerning calculation methods,
permissibility of certain price components, the level or the depiction of prices.
More attention is then focused on transparency, with regard to account fees or
lending and also to commissions paid when investment products are purchased.
Greater transparency is intended to promote consumer protection and boost
market efficiency, as transparency is one of the prerequisites for functioning
(price) competition.

26
However, one difference lies in the organisational structure (decentralised/centralised) and the
fact that a fixed programme can also be advertised accordingly.

0% 25% 50% 75% 100%
Risk-based pricing for credit products
Differentiation of prices based on product usage
Differentiation of prices based on customer value
Differentiation of prices depending on channel
Segmentation based on customer price sensitivity
Always Often Sometimes Never used
Price segmentation techniques currently used by banks 21
Survey of 107 European retail banks
Source: Oliver Wyman 2012
4.1. Transparency & consumer protection
There is no universal definition of when or at which level prices are perceived as
transparent by consumers. Efforts to boost transparency are usually aimed at
three factors: 1. Accessibility, 2. comprehensibility and 3. comparability of price
information. While the first aspect is comparatively easy to establish and the
precondition for comprehensibility and comparability, the last two criteria always
remain subjective to a certain degree. The understanding of price information is
influenced by prior knowledge and comparability by the yardstick chosen. Also,
comparability does not yet mean that an active comparison is actually made.
Moreover, some prices are perceived as being straightforward but may still be
difficult to truly compare. For example, a flat fee is easy to understand, but not
necessarily therefore transparent. For a customer to judge whether the price is
good for him he actually needs to know how his usage habits compare with
those of other customers. However, it is precisely the simplicity of the price
model that often reduces the awareness of one's own usage of the components
contained therein.
27

In order to make comparisons with other offers not only the price but also the
quality of a service would have to be comparable. This is more difficult because
quality is frequently multidimensional and not fully measurable using standard-
ised service descriptions. In addition, banks can compete with one another not
only on price but also according to other criteria, such as service or a well-
functioning and innovative online offering.
After all, customers also have differing requirements of bank services and
therefore a varied range of services can generate added value for customers.
Variety brings with it the opportunity of finding the offering that suits one's
personal requirements. At the same time it requires also somewhat more time
and effort for the individual search and comparison. The necessary precondition
for this is the availability of (price) information but also the imparting of the skills
to use it as well as the ability to assess the services offered and reflect on one's
own needs.
If sustained improvement in the transparency and comparability of financial
products is the policy goal, a certain awareness and understanding of the
product or of the accompanying services thus appears to be important. This
does not mean making one-sided demands of customers for assessment.
Instead, effort is required on the demand and the supply side. Also, compre-
hensive approaches that go further than price policy in the more narrow sense
are needed for transparency. Strengthening financial education is an important
element here and helps to create effective and sustainable comparability. At the
same time, it can also strengthen personal willingness to compare offers
because existing skills reduce information costs.
4.2. Transparency & market efficiency
In markets for retail finance products different prices can often be observed for
sustained periods. But does this automatically mean competitive failure, and
which role does price transparency play in such cases? Persistent price differ-
ences can be caused by a variety of factors:
1. It occurs with heterogeneous products, because different services are
priced at accordingly different levels.
2. Switching barriers can constrain customer mobility and thus competition.

27
For instance, one factor that prompts customers to choose flatrate offers is the desire to avoid
having to make repeated purchase decisions that are often perceived as unpleasant.

0%
20%
40%
60%
80%
100%
Savings bank Cooperative
bank
Private-sector
bank
Yes No
Customers make use of their options 22
"I am also customer of an other bank" and my
main account is held at a ...
Source: BdB, 2011
0%
20%
40%
60%
80%
100%
low level of knowledge
about financial and
economic issues
high level of
knowledge about
financial and economic
issues
Barely not at all Slightly Very (strongly)
Knowledge and interest go together 23
"How interested are you in economic matters?"
Source: GfK/BdB, 2012
Survey of youths/young adults aged 14-24
3. If customers encounter search costs and systematic information differences,
this can result in (ex ante) well informed customers paying a lower price.
Heterogeneity of products is first of all not to be equated with market failure. If
price differences reflect different needs accordingly, they do not therefore
appear problematic in the first instance. At the same time, an actually homo-
geneous product can still be perceived in different ways occasionally and
influenced by the circumstances surrounding the purchase, the quality of service
or factors such as the brand and reputation of the provider which can also be
beneficial for customers.
28
These are only partly based on objective and/or
standardisable criteria and often reflect personal preferences, for example with
regard to situation-related accessibility, brand preferences or requested
services.
Barriers to switching, by contrast, can be a problem from the customer's point
of view and because they can seriously impair market efficiency. The challenge
is that although an outcome, i.e. low switching rates, can easily be observed,
pinpointing the actual underlying reasons for such rates is, more difficult. A small
number of active switchers does not necessarily mean there is little competition,
since it is precisely when switching is easy that providers have to make special
efforts to appeal to customers. If they succeed in these endeavours, the result is
also low switching rates. On top of this are implicit barriers to switching
financial products that are virtually impossible to regulate sensibly, such as
personal relations with client advisors or the fact that family or friends use the
same provider. Experience also shows that socio-demographic factors influence
the need to switch and the perception of barriers to switching financial products.
For example, young employed people tend to switch more often than
pensioners. If regulation is to be used to address barriers to switching, a
detailed examination of the reasons has to be conducted taking into account the
specific market conditions as the prerequisite for improvements.
In has been noted above that dissatisfaction with prices can be the motivation
for switching. However, an excessively complex price structure can make
switching difficult, if it makes comparisons onerous and thus increases search
costs. One argument here is that a complex pricing structure can be used
deliberately to achieve higher prices. Theoretical models indicate that this can
occur if some customers are better informed than others. Even new entrants to
the market do not necessarily result in price reductions in this case.
29

There are nevertheless reasons which make complex pricing structures a less
appealing strategy. Technology reduces information costs for consumers and
therefore makes it potentially easier for them to gather information about
products and prices. This applies for new purchases but also with regard to the
ongoing comparison of conditions for already purchased financial products and
the assessment of potential alternatives.
A high degree of complexity might also be more difficult to depict, especially
when customers are searching for quick information "at a glance". In addition,
especially as a consequence of the financial crisis many customers prefer
simple products and occasionally have strong reservations about perceived
complexity. This is indicated both in surveys in which factors such as
transparency and simplicity are given a higher weighting by the respondent
consumers than was the case before the financial crisis and by the large inflow
of assets into simple savings products. Especially against this background a
lack of accessible and comprehensible information may be perceived as a

28
This type of price differentiation can be observed even in easy-to-compare everyday products
and services, such as a cup of coffee, where prices are very transparent (in the sense of being
easy to locate and understand) and nevertheless occasionally differ significantly.
29
See Carlin (2009).

0
20
40
60
80
100
Client advisor Customers
Totally agree Agree
Neutral Disagree somewhat
Do not agree
Transparency as the main issue for
customers and client advisors 24
"Customers are demanding more simple, under-
standable and transparent products."
n=147 advisors and 2,016 customers
Source: Steinbeis Hochschule, 2012
drawback by customers. By contrast, a good supply of information, on prices
and beyond, can help to satisfy quality-minded customers.
Ultimately complexity will become increasingly unappealing if consumers are
well informed and see through this strategy. The differences that exist between
the information possessed by customers and providers are due in part to
specialisation advantages. Nevertheless basic knowledge of economics and
investment principles often suffice to ask key questions. Also, basic knowledge
makes it easier to handle new information. This underlines the importance of
financial education geared towards consumer protection and competition
matters. Consumers can thus make more conscious investment decisions and
select those products and financial services that really are the best fit for their
own requirements.
5. Conclusion
Price policy is especially important in the current situation, in which banks are
searching for profits and growth opportunities and at the same time the relation-
ship of trust between customers and banks is being redefined. Although it is not
a panacea, pricing is a necessary element in mastering these key challenges.
This analysis has shown that pricing calculations for retail finance products are
complex as they rely on numerous pieces of information especially the
reactions and opinions of the customer.
This means that one key to the success of retail banks' pricing policy is their
capacity to identify and collate the information required to set prices and make
decisions on this basis. The technical capabilities for analysis have grown con-
siderably in the past years. They provide the potential for delivering thoroughly
informed pricing decisions, making more adroit use of more complex indicators,
such as customer satisfaction, and also being able to evaluate and adapt
decisions more quickly. The challenge for retail banks is to make smart use of
these new capabilities to develop more customer-centric offerings.
Especially in view of the trend towards greater transparency there will also be a
greater onus on banks to be convincing in communicating both their prices and
the services that they provide.
Ideally, regulatory framework conditions can act as a catalyst in this process.
The decisive factor, however, is an evidence-based approach to regulation that
acknowledges the multifaceted nature of the price determination processes in
retail banking. In particular, the formulation of Europe-wide regulations will
remain a particularly challenging domain.
Patricia Wruuck (+49 69 910-31832, patricia.wruuck@db.com)

0
20
40
60
80
100
2003 2007 2009 2011
Source: BdB, 2011
Need to teach economics at an early
stage 25
"Teaching of economics and business matters
at schools should be intensified." Agreement in %
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Focus Germany:
GDP forecast: Uptick in Q1, slippage in Q2 ..................... April 30, 2013
Focus Germany:
Sentiment indicators another setback in spring .............. April 2, 2013
Focus Germany:
The worst is (probably) over ............................................ March 1, 2013
Focus Germany:
Gradual improvement in 2013 .................................... January 28, 2013
Two years of Arab Spring:
Where are we now? Whats next? ............................. January 25, 2013
FATCA & Intergovernmental Agreements:
Automatic exchange of information on
taxes on the rise ......................................................... January 16, 2013
Medical technology:
Electromedicine driving healthcare ............................. January 16, 2013
More value creation through knowledge (assets):
Implications for regional growth strategies .................... January 7, 2013
Germany at the polls:
The 2013 elections and the future of the euro .............. January 4, 2013
The future of (mobile) payments:
New (online) players competing with banks............ December 20, 2012
Focus Germany: German business cycle
at the turning point? .................................................. December 3, 2012
Universal banks: Optimal for clients and
financial stability ...................................................... November 20, 2012
GCC financial markets: Long-term prospects for
finance in the Gulf region ........................................ November 14, 2012
Foreign investment in farmland:
No low-hanging fruit ................................................ November 13, 2012
Focus Germany:
Euro crisis brings economy to a standstill
in the winter half ........................................................ November 2, 2012
German industry: Only moderate recovery
in 2013 ......................................................................... October 19, 2012

Fiscal policy in US states .......................................... December 8, 2011
Germany: St. Nicholas and
Knecht Ruprecht ........................................................ December 5, 2011
Chinas financial integration
into the world economy:
Scrutinising Chinas international
investment position .................................................. November 23, 2011
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